Employment Numbers Surprise Most and Change Fed Expectations (Again)

In contrast to February, March employment numbers surprised on the downside, with adjustments to January and February reducing employment for the first three months to a seasonally adjusted average rate of 197,000, down from 220,000 previously. As we said last month, we would have expected some payback as the true impact of the weather, the port strike, and what was happening in the oil patch worked its way into the revised numbers and the month of March. Still, this was a surprising number on the low side.

On the wage front, however, hourly earnings were up 0.3%. This is a little suspect given the layoffs and likely reduction of hours related to the oil patch where earnings are quite a bit higher than the average. If true, combined with average weekly payrolls, it pushes incomes up at more than a 5% annual rate for the first quarter. The anecdotal evidence, to some extent, continues to support that the labor markets are tight, and some companies are responding by raising hourly wages and adding more training for employees. The headline companies have been in retailing—Walmart and Target. McDonald’s has joined the crowd where it could, raising wages 10% in its company-owned outlets. These companies are seeing something in the difficulty of retaining employees with turnover hurting the quality of service. Given what we are seeing on the corporate revenue front, this likely reinforces the view that profits will be disappointing.

The Fed will continue to be data-driven. The employment numbers and the likely GDP print may keep the Fed on hold beyond mid-year, or it could simply change the rate at which fed funds will rise. We are watching the employment numbers, wages, and commodities. I hate to say that we need more data. Maybe April will provide that. The surprise could be a bottoming on the commodity front aided by growth in Europe and parts of Asia and some tempering of the rise of the dollar. The bearish technical trends of the hard commodities, particularly the industrials, would lead one to believe we are in a global recession. I don’t think so. This bears watching, but it most likely indicates that China, the big marginal buyer, is weaker than general expectations. In addition, energy is a major input into extraction and smelting in all of the metals. The lower energy prices reduce significantly the variable cost of production. Mines or smelting activities, which have been operating on the margin, have likely seen that margin improve thus pushing output higher than it might have been otherwise. If there is a variable contribution to overhead production continues. Please take a look at our recent Perspectives update on “What More to Expect in 2015…” for more on this topic and others. In the meantime, the activities in the commodities sector, combined with currency fluctuations, have been interesting for managed futures managers. The variations in performance among equity sectors have been a boon to active equity managers. And, fixed income managers more focused on absolute return have had choices to make. Worth paying attention to this changing environment.

Now, for the geeks who managed to make it through last month’s observations on employment, here’s an update:

The actual unemployment rate fell 0.08% in February—not quite enough to push the overall rate down another tenth, but close. As we pointed out last month, the unrounded February rate was 5.545%. March was 5.465%. Twenty-five thousand more employed would have taken the rounded number down to 5.4%. That brings us back to the seasonal adjustments, which we discussed last month. The table from last month has been updated below through March.

As one can see, the seasonal adjustments are significant, and vary year-to-year and revision-to-revision reflecting new data; different birth/death numbers for small businesses; adjustments for unusual events (e.g., weather); and other factors. I will point out that, historically, the big unadjusted reduction in every January for the last several years is almost completely made up by the total of the subsequent three months. If that happened again this year and was precisely equal to 2,818,000, the unadjusted number in April would ultimately be 1,158,000. April is a big hiring month. How that translates into seasonally-adjusted numbers is not as clear. Our view is that the labor market is tight. We have some adjustments to live through out of the oil patch, but we will likely find ourselves back into economic numbers that indicate a growing economy here, but with different sectors providing the investment opportunities relative to what was experienced up until the end of US QE.